RabidPirateMan, you CANNOT disjoin fluff and crunch. You just can't - the very notion is ridiculous. Crunch exists to mechanically represent fluff - it cannot be a baseless abstraction. As a result, if this means keeping certain racial stereotypes, we must do so. As K said, you cannot remove system mastery (having some options be better some of the time than at other times) without removing all consequence of choice (and ending up with 4E, which doesn't do this for races in any case). Thus, due to both of these considerations, the fact that some races are better at being something than others must, and hopefully will, remain.
Fluff is what makes the game fun, but this isn't 'Rewrite the DnD multiverse.' I'd say its fluff that makes some of DnD imbalanced anyway (poor understanding of the system they were making is the biggest culprit though). Half-Orcs are bad because what they get doesn't match with what they lose, but fluff-wise, it makes sense: they have poor thinking abilities, and half-orcs aren't pretty or polite.
Mechanically its borked, but storywise, sure, why shouldn't half-breed mongrols of a barbaric race be dumb and ugly?
So according to the wotc canon, most dwarves are fighters. Great. There are those who want that represented in the game. My point is, it already is. + to con, - to a dump stat, farmiliarity with a cool weapon, etc. They are better at being fighters than, say, halflings. This is with or without the existing favored class mechanic.
Some races are better than others. Halflings make better Sorcerers than Dwarves, even though its not represented by their favored class.
So fluff can still be there- put under their description block, 'You know, most dwarves become fighters. Just fyi.'
And my statement about humans probably wasn't written as clearly as it should have been- my point is, with or without the existing favored class mechanic, aren't humans already very strong? Imagine 3.5 as is, except there is no multiclass penalties and no favored class. Humans are still the most powerful class, but now players can multiclass without penalties. What's wrong with that?
Now, I haven't convinced you, so I think that means I'm missing something. I don't want to slow things down, so if everyone agrees to keep favored classes mechanically represented, I'll drop the issue. Not trying to get in the way, just adding discussion